Supercell just sold a 51 per cent stake for €1.1bn to Japan’s SoftBank and games developer GungHo. Rovio’s Angry Birds is a household name. Annual startup event Slush is a must-attend every November. What underpins the startup scene in Finland – and what might Germany be able to learn? Tobias Salomon, a lawyer at Salomon Law and German-Finnish expert in Berlin, digs in…

According to a recent Dow Jones VentureSource report, the first quarter of this year was already a very successful one for startups in Finland. Venture capital-receiving companies raised €134m, 12 per cent of the total money invested in startups across all of Europe. Only startups in Britain and France raised more money.

Two essential factors, in general, contribute to the success of startups in Finland: public support for enterprises and the Finnish corporate legal code.

The first secret ingredient – public funding

Public support for startups is mainly organised by Tekes, the Finnish Funding Agency for Technology and Innovation. In 2012 Tekes made funding decisions on 1640 projects that resulted in total investment of €570m, of which €353m was invested in enterprise projects. Companies younger than six years received about €140m – Tekes has a special programme for young innovative companies with maximum funding of €1m per enterprise.

When a startup applies for a grant, it may do so generally only in order to finance already existing costs. Eligible costs include employee wages, travel costs as well as services purchased externally. A loan, on the other hand, is granted for future investments. Loan rates are subsidised three per cent below the basic/standard interest rate but never fall below one per cent. In either case, the startup must meet certain legal requirements – including a corporate headquarters in Finland, definition as an SME by the EU Commission’s standards and having raised no other public funding.

In addition, in 2009, the Finnish Ministry of Employment and Economy launched a programme in cooperation with Tekes, Finnvera, private investors and serial entrepreneurs called Vigo, which aims to bridge the gap between early-stage tech firms and international venture funding. It is formed by the Vigo Accelerators, which consist of selected independent companies run by entrepreneurs and executives, and include Cleantech Investment, East Wings, Gorilla Ventures, Innovatum Partners, KoppiCatch, Lifeline Ventures, Newentures, Royal Majestic Helsinki, Vendep and Veturi Venture Accelerator.

The most prominent startup supported by Vigo Accelerator Lifeline Ventures, is the previously-mentioned mobile gaming company Supercell. Supercell grossed $100m last year in the Apple App Store and $179m in the first quarter of 2013 alone. After expenses and Apple’s 30 per cent cut, the company netted $104m. Another recent Vigo success story is KoppiCatch Accelerator’s RapidBlue Solutions. The company provides in-store accounting services and was acquired by US-based ShopperTrak this year.

A model for other countries to follow?

With huge successes such as Supercell and Rovio, could other countries benefit from the Finnish model of public funding? Opinions within Finland on the merits of public funding for startups differ. Rovio CMO Peter Vesterbacka is the most prominent critic of public funding, arguing that private venture capital won’t enter a market where startups are supplied with public money. On the other side of the debate, Supercell CEO Ilkka Paananen has spoken out in favour of public funding programmes and pointed out that without the support of Tekes, Supercell would not have been possible.

Due to the complexity of this topic and changing concepts of public funding, it is not all that easy to take sides in this discussion. With the Vigo programme, where two-thirds of the funds raised by the startups typically come from private sources, including international VCs, even the line between public and private funding is vanishing.

A favourable legal framework

Finnish corporate law also suits startups well, by offering a good legal framework for both founders and investors.

The Finnish limited liability company is the Osakeyhtiö (Oy). The minimum legal capital requirement for a non-public Oy is €2,500 (compared to the €25,000 required for a German GmbH). The registration of a company takes 12 workdays on average and the typical fee is €380 euros with a reduced online registration fee of €330.

On the investors’ side, unlike the German GmbH, shareholders of an Oy can agree on disproportional voting rights within corporate by-laws – something most venture capital investors appreciate. In effect, a VC investor with a minority share stake can extend their voting rights and achieve control of the target company.

Those familiar with the GmbH and venture capitalists will certainly have come across voting arrangements, or Stimmbindungsvereinbarungen as they are known in Germany. From a VC perspective, voting arrangements are crucial when dealing with a GmbH or AG. According to German law, voting rights cannot be transferred to other shareholders under corporate by-laws. VC investors must rely on discrete agreements with founders and shareholders to ensure extended voting rights in due proportion with the financial risk they take on with their investment – yet another point of contention during negotiations.

Finland has a tradition of young innovative companies playing a significant role in the economy – and VC funding, public support and a strong legal framework play a significant part in that. Recent developments imply that the Finns might have found a way to create an entrepreneur-friendly habitat.

Yet fundamental laws of logic should prevent copycatting the schemes in Finland and importing them straight to Germany. There are just too many differences in the details.